Request for Proposals Actuarial Consulting Services April 13, 2010

1. Managing Drug Expenditures – One Year Later Request for Proposals Actuarial Consulting Services April 13, 2010 November 3, 2010 Alisa Bennett, FSA, EA, FCA, MAAA

2. Background Employer Retiree Group Health Plans Medicare Part D Options • Retiree Drug Subsidy (RDS) • Fully insured Medicare Part D Prescription Drug Plan (PDP) – or 800 series EGWP • Direct Contract with CMS – Employer Group Waiver Plan (EGWP) • Eliminate drug coverage for Medicare eligible retirees

3. Background Retiree Drug Subsidy (RDS) • Continue to offer drug coverage to Medicare eligible retirees just as before Medicare Part D. • Obtain attesting actuary to attest to: • Creditable coverage – employer plan must provide drug coverage as least as good as Medicare Part D. If not, retiree will be subject to late enrollment penalties if enrolls in Medicare Part D sometime in the future. • Net value of the employer-sponsored portion of the benefit must equal or exceed the net value of benefit under Medicare Part D. • If 1. and 2. above are satisfied, then the employer receives federal subsidy payments equal to 28% of each qualifying member’s allowable prescription drug costs between the cost threshold and cost limit.

4. Background Retiree Drug Subsidy (RDS) Advantages • Receive federal subsidies where there were none before Medicare Part D. • No change to plan design or administration unless necessary to pass actuarial equivalence tests. Disadvantages • Administrative burden – both actuarial and recordkeeping. • No low income subsidy. • GASB 43 and 45 disadvantage over other options. Although federal money is received by the plan to offset drug costs for Medicare eligible retirees, this money can only be recognized as a GASB 43 or 45 asset when received and deposited in the Trust. No future RDS payments can be anticipated to offset liability for future benefit payments.

5. Background Fully Insured Medicare Part D PDP • Drug coverage to Medicare eligible retirees provided on a fully insured basis by purchasing coverage. • If large enough employer group, vendor usually willing to design specially tailored plans to mimic as close as possible the current plan. May continue to cover non-Part D drugs for extra premium. Possible disruption in pharmacy networks. • Possible to enter into 800 series EGWP where third party contracts with CMS. Retain plan design and experience (favorable or unfavorable) with the plan, but vendor contracts with CMS for an additional admin fee. • Plan will need to make other arrangements for pre-Medicare eligible retiree drug coverage.

6. Background Direct Contract Employer Group Waiver Plan • Plan sponsor contracts directly with CMS to provided PDP. • Plan would receive a base monthly subsidy payment equal to: (National Average Part D Basic Bid) – (Average Beneficiary Premium) • Currently $54.71 per member per month. • Same for all participating employer and plan sponsors. • Additional subsidies are paid (at year end) for members that either: • Qualify for a Low Income Premium Subsidy (varies based on member’s income relative to the Federal Poverty Level) – passed through to member. • Incur drug claims above a catastrophic level – CMS pays a significant portion of these costs.

7. Healthcare Reform • Elimination of tax deduction for Retiree Prescription Drug Subsidy (RDS) • Effective for tax years after December 31, 2012 • For tax paying entity, reduces the value of the subsidy

8. Healthcare ReformElimination of Medicare Part D Doughnut HoleBrand Drugs

9. Healthcare ReformElimination of Medicare Part D Doughnut HoleGeneric Drugs

10. Healthcare Reform • Elimination of Medicare Part D doughnut hole and elimination of tax deduction for RDS subsidy payments makes RDS an even less attractive option compared with PDP. • Elimination of Medicare Part D doughnut hole is not to be considered when performing actuarial equivalence tests for RDS. Suggests improvements to Medicare Part D do not mean improvements to RDS. • RDS website: The Healthcare Reform Bill includes language indicating that any discount or coverage for drugs in the “donut hole” does not impact the actuarial value of Standard Medicare Part D coverage for purposes of the RDS actuarial equivalence test. • Makes elimination of employer group sponsored drug benefit for Medicare eligible retirees a viable option.

11. GASB 43 and 45 • RDS has GASB 43 and 45 disadvantage over other options. Although federal money is received by the plan to offset drug costs for Medicare eligible retirees, this money can only be recognized as a GASB 43 or 45 asset when received and deposited in the Trust. No future RDS payments can be anticipated to offset liability for future benefit payments. • For postemployment benefit plans that offer health coverage for life, up to 65% – 70% of liability comes from Medicare-eligible retirees (includes future Medicare eligible retirees). • Even though one-year cost for individual Medicare eligible retiree less than that for a pre-Medicare retiree, most of the future lifetime of the retiree population spent as Medicare-eligible. • Approximately 2/3 of a Medicare-eligible retiree’s liability comes from drug costs.

12. GASB 43 and 45 Reduction in GASB 43 and 45 Liability in Year Switch from RDS to PDP

13. GASB 43 and 45 • “Savings” really an accounting issue. For GASB 43 and 45 liability purposes, PDP allows recognition of all future Medicare Part D subsidies for the life of the plan (unlike RDS). • Actual cash savings for switching from RDS to PDP equals amount of premium savings or CMS reimbursement greater than RDS subsidy amounts. This amount depends on: • Cost of PDP arrangement (cost of insurance, additional administrative fees through either vendor or direct contract EGWP). • Sharing of savings with Medicare eligible retirees through premium reductions. • Plan design.

14. Plan receives a base monthly subsidy payment equal to: (National Average Part D Basic Bid) – (Average Beneficiary Premium) Direct Contract EGWP

15. For 2011, National Average Part D Basic Bid has decreased even though coverage has increased (7% of generics in doughnut hole covered). For 2011, Average Beneficiary Premium has increased. Therefore, base monthly subsidy to plan has decreased. What to expect in future years as doughnut holes closes? Direct Contract EGWP

16. Additional subsidies are paid (at year end) for members that either: Qualify for a Low Income Premium Subsidy (varies based on member’s income relative to the Federal Poverty Level) – passed through to member. Incur drug claims above a catastrophic level – CMS pays a significant portion of these costs. Direct Contract EGWP